Precision Castparts Corp. (PCP) released its second quarter fiscal 2011 earnings results before the market opened today, reporting earnings from continuing operations of $1.70. The earnings reported by the company surpassed its year-ago quarter figure of $1.54 and the Zacks Consensus Estimate of $1.68. The company benefited from strong sales growth in aerospace and general industrial businesses and due to an improved cost structure.
Total revenue increased by 17% year over year to $1.5 billion, above the Zacks Consensus Estimate of $1.4 billion.
Segment Details
Investment Cast Products segment sales were $512.3 million, up 15% year over year. Aerospace orders increased substantially in the quarter, leading to a 25% increase in sales. However, sales of industrial gas turbine (IGT) remained weak. The segment operating income was up by 20%.
Forged Products sales totaled $668.7 million, reflecting an increase of 29%. This segment also witnessed a revival in its base aerospace business across all operations, with aerospace sales growth of 40% (excluding contribution from Carlton Forge). Sales of General Industrial also increased by 40% in the period. However, Seamless Pipe sales were down by approximately 50%. The segment operating income was up by 8.5%.
Fastener Products sales in the quarter totaled $327.1 million, flat year over year. Differing from the other two segments, a low OEM (original equipment manufacturer) and distributor demand led to a 5% decline of Fastener Products sales in the aerospace market.
Further, sales of airframe structural fasteners, a core market of Fastener Products, declined by 50% at two of the segment’s major manufacturing facilities. The segment, however, continues to increase its market share of aerospace product and is building a strong position to benefit from recovery in demand. The segment operating income was down by 12.4%.
Income & Expenses
Operating income was $362.6 million compared with $337.3 million in the prior-year quarter. Net income from continuing operations in the quarter was $243.6 million compared with $218.4 million. Net income from discontinued operations during the quarter was $7.4 million.
The company incurred SG&A expenses of $98.3 million compared with $88.5 million.
Balance Sheet
Cash balance at the end of the period amounted to $410.6 million, and debt dropped to $237.6 million. Shareowner’s equity was about $6.5 billion.
During the quarter, the company incurred capital expenditure of $28.5 million compared with $32.1 million in the second quarter of fiscal 2010.
Conclusion
Precision Castparts is one of the few manufacturers that can consistently produce the largest and most complex structural investment castings in quantities sufficient to meet customers’ quality and delivery requirements. Its emphasis on low-cost, high-quality products with timely delivery has made it the leading supplier of structural and airfoil castings for jet aircraft and IGT engines, and has expanded into the structural airframe and armament markets. The commercial aerospace market cycle is critical to demand for precision investment casting products.
Large jet aircraft engines are manufactured by a small number of suppliers, including General Electric (GE), Pratt & Whitney (a division of United Technologies Co., UTX), Rolls-Royce and several joint ventures. As a result, it is believed that a high level of customer service and strong, long-term customer relationships will continue to be important for achieving corporate goals.
Precision Castparts has been supplying castings for jet engines to GE for more than 40 years, and has been supplying Pratt & Whitney with castings for more than 30 years for its military and commercial jet engines. In addition, Precision Castparts has supplied small structural investment castings to Rolls-Royce for approximately 25 years and large structural castings for approximately 20 years, most recently for use in its Trent series of jet aircraft engines. As the company has been able to cast larger and more complex parts, manufacturers of large jet aircraft engines have made increasing use of its structural castings.
We currently maintain our Neutral rating for the long term on Precision Castparts, with a Zacks #3 Rank (short-term Hold recommendation) over the next one-to-three months.
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